In plain words: Basic raw materials (e.g., gold, oil, wheat) standardized and traded on the global financial market.
Commodities are basic raw materials that are standardized so they can be traded interchangeably on global markets. They fall into broad groups such as energy, metals, and agricultural products. Because one unit is essentially identical to another, prices are set by global supply and demand rather than by any single producer's brand.
What makes commodities behave differently from shares?
Commodity prices respond to physical forces: weather, harvests, mining output, geopolitical events, and shifts in industrial demand. This means they often move out of step with global equities and bonds. That low correlation is why some investors view commodities as a tool for diversification within the broader category of alternatives.
How do commodities fit into a diversified portfolio?
As an asset class, commodities can add a different return pattern, but they generate no interest or earnings and can be highly volatile. Within a curated asset allocation they tend to appear as a small, optional slice rather than a core holding, reflecting both their potential benefits and their swings.
Key takeaways
- Commodities are standardized raw materials traded globally.
- Their prices are driven by physical supply and demand.
- They can aid diversification but are volatile and pay no income.